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Contact me: rcushing(at)GeeWhiz2ROI(dot)com or Twitter: @RDCushing

30 November 2009

Setting priorities

If you and your management team have been working along with this series on The New ERP – Extended Readiness for Profit, then you have already created your organization's CRT (Current Reality Tree) and discovered what needs to change. Also, you have determined some potential courses of action – some answers to what the change should look like and how to effect the change – based on the roots found in your CRT. Now it is time to start setting priorities between the options that lay before you.

As we pointed out earlier, your organization's "bottleneck" is the choke-point in your system that reduces the flow of Throughput (T) into your organization. If you have identified your "bottleneck" or constraint, then you should always address your constraint first. In effect, you want to strengthen the weakest link in your chain of Throughput-producing functions. However, how should you and your management team prioritize multiple improvement projects that may each lead to improvement in organization's "bottleneck"?

There are two basic formulas to apply in making such evaluations and setting priorities. For proposed initiatives that require no additional investment (I), simply comparing the Benefit value is generally sufficient, and the following formula should be applied:

Where additional Investment (I) is required to make the proposed changes, then apply this formula:

ROI = (delta-T – delta-OE)/delta-I

Where, I = Investment
(including increases or decreases in inventories)

[Also, see definitions in Part 1 of this series.]

You will undoubtedly notice that the value of "Benefit ($)" is nothing more than the top portion of the "ROI" calculation formula. Therefore, while initiative-specific ROIs may be calculated only for those changes that will require a change in Investment (i.e., delta-I is not zero), the "Benefit ($)" value for any number of change initiatives may be compared. (This is also true for the Net Present Value [NPV] of the estimated multi-year series of "Benefit ($)" calculations for an array of different proposed initiatives.)

Once your team has calculated the Benefit or ROI, or both, for the potential change initiatives suggested by the analysis stemming from your Current Reality Tree, you can then set them in priority order. Those initiatives that reap the greatest estimated "Benefit ($)" or greatest relative ROI should be undertaken first, then the initiatives that produce lesser values may be considered for action.

My recommendation, however, is that before your team takes on subsequent improvement projects, they should reassess the Current Reality Tree to be certain that changes made in prior initiatives did not have unexpected affects that change other aspects of your reality. Addressing new or slightly different roots may be required, or perhaps you will discover that having dealt effectively with one root, your system has reaped unexpected positive results in other areas, as well.

25 November 2009

Let us stop to compare where our management team is now in its decision-making process with what an organization that embraces traditional ERP – the Everything Replacement Project – might be going through in their processes.

How do most small- to mid-sized businesses go about setting budgets for their major or minor IT initiatives? We will take a look at a few of the methods I have run into over the years:

Don't set a budget: Far too many firms simply find out what the executives and managers think needs to be done, and then get quotes from some vendors or resellers on what it will cost. This gives them the "cost" – assuming it is accurate, but many times it is not. As for "benefits," may management teams just "expect improvement" in some unquantified and unquantifiable way. They don't have a "budget" and they don't have an "ROI." Furthermore, they generally don't measure the results of "improvement" afterwards either.

Educated "guess": In such cases, frequently the CFO, the president, or someone from IT is simply asked to "put together some numbers." Frequently, these almost exclusively "cost" numbers come from telephone conversations with vendors or resellers, Internet searches, or conversations with people from other companies that have done something similar. Again, in far too many cases, the management team does not even attempt to quantify the "benefits" or calculate an ROI for the proposed initiative.

How much can we afford? Naturally, this attempt at "budget"-setting comes directly from cost-world thinking and entirely neglects the fact that, if the organization is going to see no increase in Throughput (T), no decrease in Inventory or Investment demands (I), and no significant decrease or future savings in Operating Expenses (OE), then the budget that should be assigned to the project is zero-dollars.

Find out: This approach is almost equivalent to "Don't set a budget" above inasmuch as the method (if you can call it that) amounts to "finding out" how much an Everything Replacement Project will cost, then factoring it for "overruns," which have come to be expected in the industry. Again, this approach has no bearing on the value the traditional ERP project will bring to the organization, only the anticipated "cost" to the firm accompanied (frequently) by only the vaguest of notions as to how the change will actually increase Throughput (T), or reduce Inventories or demand for new Investment (I), or drive-down or hold the line on Operating Expenses (OE) while sustaining growth. Unfortunately, often times even the "growth" itself is merely assumed.

Comparatives: This approach is simply a variation on "Don't set a budget" or the "Educated 'guess'" methods. Here the way it's done is to get the CEO or other executives to ask their golfing buddies or other industry friends (and maybe even relatives) how much their companies paid for their last Everything Replacement Project. Once again, no focus is placed on specific areas of improvement and the far too frequently the estimates of "benefits" and "ROI" are vague – to say the least.

Now, I know you probably laughed out loud (or at least chuckled to yourself) when you read some of the above "methods." The fact is, it is funny to read these when the truth is laid out in some embarrassingly plain language. However, as sad as it may be, many of the budgets for IT initiatives I have run into over the years have no more substantial basis in reality or value for the enterprise what I have described above.

Of course, given the scenario for "budget setting," it can hardly be a surprise to find that many owners, executives and managers make many, many wrong decisions about what kinds of investments their firms should make in information technologies – or other improvement efforts, for that matter. They also frequently make wrong decisions regarding how much to spend on improvements in any given functional area, since they are quite often at a loss to link daily execution improvements with financial results.

By the way, as you can see from the approach we have laid out in our radically new Extended Readiness for Profit – the New ERP, it may be as foolish for a CEO to under-invest in technology (or other improvements) – because she does not understand the dollar-benefits that would be delivered by such investments – as it is to over-spend on technologies. (Here I draw the clear distinction between investing and spending. An organization is investing if they have calculated the benefit relative to the expenditure; whereas, an organization is only spending if they have not calculated the benefit relative to the expenditure or no actual increase in Throughput, reduction in other Investment, or decrease in Operating Expenses will likely result from the expenditure of time, energy and money.) Either way, the CEO is probably doing long-term damage to her own organization – making it less capable, not more capable, of delivering more profit today and in the future.

This clearly highlights the value of the Current Reality Tree (CRT) (see prior posts) in helping your management team identify "what needs to change" before taking any steps toward assuming that new technology – applied in a general way – will deliver some general, but unquantifiable, benefit to your organization.

If you and your management team are following along in our Extended Readiness for Profit – the New ERP approach for your own organization, then you now need to take some time to calculate the values for the changes in T, I, and OE with regard to the actions you may have under consideration – whether they are technology-related or not. Your proposed actions, of course, should be based on the findings at the roots of your CRT. (For those of you just catching up, you will probably need to go back and read prior posts on The New ERP.)

24 November 2009

Calculating an ROI for a specific improvement initiative

Here is something that is rarely done effectively in preparing for traditional ERP – an Everything Replacement Project: our management team at the example company (see prior posts) now has everything it needs to calculate ROI for the specific warehouse and pick-ship initiative they have under consideration. Here is the formula they will apply:

ROI = (delta-T – delta-OE)/delta-I

Where T = ThroughputOE = Operating ExpensesI = Investment

Substituting into this formula the numbers calculate by the team (see prior post), we get:

ROI = $0 – (-$168,942)/$75,000 = 225.3% in the first year

"But," you say, "this company will not experience the full $168,942 in savings in the first year!" And, of course, you are correct. The management team recognizes this also. So, they quickly do some "napkin" calculations and estimate that, as revenues grow, they may reap about 40% of the calculated annual savings through deferred hiring of additional FTEs (full-time equivalents) in the first 12 months following the implementation. This means our first-year calculations need to be adjusted as follows:

What these calculations tell the management team is this: "If we invest up to $75,000 in an initiative to improve processes highlighted by our Current Reality Tree (CRT) (see prior posts) in the areas of bar code printing, ASN (advanced shipping notice) processing, and picking-shipping operations; and our Throughput continues to grow; then we ought to see about 90% of the money invested in this initiative returned in savings to the organization within the first 12 months following deployment." (Note: The real firm upon which this scenario is predicated had been experiencing double-digit growth in sales for more than five consecutive years when I was introduced to them.)

This also tells the team that, in subsequent full years, since no additional investment is required (unless they should wish to capitalize some portion of the software maintenance), the company should continue to reap about $169,000 in annual savings as a reward for this effort. (Note: If anyone wishes to extrapolate further from these figures, it would be possible to calculate the Net Present Value [NPV] of the series of estimated cash flows resulting from this or any other particular Extended Readiness for Profit – the New ERP – initiative. While this is not generally required for initial decision-making, the true value of the initiative – and, indeed, the value of the firm as a whole – is best represented by the NPV of "the system.")

23 November 2009

Jeepers! Creepers! Where'd you get those numbers?

In the last post, I said that the management team in our unnamed example company had estimated the following for a change proposed in their warehousing operations:

Change in Throughput (delta-T) = $0

Change in Operating Expenses (delta-OE) = $168,942

Change in Inventory/Investment (delta-I) = $75,000

Let us now take a look at a relatively quick way to get to numbers such as these without suffering paralysis by analysis.

One shorthand way to estimate changes in OE is the use of the value of a typical or average FTE (full-time equivalent) in the department or area being affected. This effective and rational method allows us to create estimates of potential savings (or added costs, if that be the case) even if no actual employees are going to be laid off or hired as a result of the proposed change. Here is how: While firms seldom layoff employees as a result of process improvements – and we highly endorse such acts of employee retention – if the firm is focused first and most importantly on increasing Throughput (T), the organization will actually experience these savings over time by being able to support growth in Throughput of 30%, 60% or even 100% or more without adding to Operating Expenses by forestalling the hiring of additional personnel.

By extrapolating from this calculated FTE value ($49,686), here is how the management team took the next step to estimate annualized savings from the proposed changes in the warehouse and picking-shipping operations:

At this point, our example management team also made an arbitrary decision. They established a preliminary investment budget of $75,000 to cover the cost of technologies to provide (at a minimum) the three critical functions of:

Integrated bar code printing

Integrated ASN processing, and

Paperless (or near paperless) picking and shipping operations

Since our management team has no predisposition for an Everything Replacement Project (traditional ERP), they have many options open to them. They are focusing solely on Extended Readiness for Profit – my radical new approach to ERP. Therefore, they could take advantage of any one or more of the following courses of action:

Develop integrations between existing bar code applications and their inventory management software. Most of the better bar code applications on the market today already provide APIs (application program interfaces) and ODBC (open database connectivity). These capabilities would help keep the cost of development reasonably low and permit relatively easy and low-cost changes as demands on the organization change over time.

Purchase and integrate an EDI (electronic data interchange) engine with their existing inventory management and sales order processing software in order to generate and deliver ASNs (advanced shipping notices) for them. This project would have to be coordinated with the solution chosen to handle the paperless picking and shipping operations, however.

Acquire a paperless shipping and manifesting application and leverage its APIs to integrate it with the firms existing inventory and sales processing application. They might even hit the jackpot and discover a shipping and manifesting solution that includes ASN processing as part of the package, or has already been successfully integrated with their existing inventory and sales processing application.

Roll their $75,000 budget into a large project that may be part of replacing an existing inventory or sales processing application.

If they choose the last option, they should still predicate their purchase and implementation budget on the sum total of all measurable improvements and savings anticipated from all outcomes when compared to their Current Reality Tree (CRT). They should not arbitrarily throw money into the budget "kitty" based on some vague feeling that "more technology" or "newer technology" will automatically make the organization more profitable or stop losses. That is to say, never substitute a traditional ERP (Everything Replacement Project) for a focused and measurable Extended Readiness for Profit (the New ERP) program.

20 November 2009

Evaluating alternatives

Based on the management team's analysis in our example company (see prior posts in this series), they have come to the conclusion that their system's current "bottleneck" – or, constraint – is in their pick-pack-ship operations. Since they have already agreed that there are so many crossovers in personnel and functions between general warehousing operations and picking-shipping, they are going to consider CRT roots 1, 2 and 5 together.

This makes a lot of sense inasmuch as any technology that might be applied to the warehouse is likely to include functionality that will supplement multiple areas. The areas of concern, as determined by the CRT roots, are:

Integrated bar code labeling

Integrated ASN generation

Reduction or elimination of paper-based processing of picking, packing and shipping operations

Using this list of critical factors generated directly from the organization's CRT, the management team knows already "what needs to change" and, by implication, the key functions that any technology must supply to help the organization actually move toward increasing Throughput while holding the line (or maybe, cutting) Operating Expenses.

While intuition alone might bring some organizations to this point, if the management team has not documented (I mean literally written down) the logic that brought them to these decisions, they are in a far poor position to evaluate the failure or success of any implemented changes that may flow from their decisions. (It is beyond the scope of this present discussion to cover these matters in more detail, it is at this point that other Thinking Processes tools – like the Transition Tree and Future Reality Tree – might be applied by our example company's management team to determine what the change(s) should look like and how to effect the change(s) required.) This means, of course, that if the team were to take the approach of Traditional ERP – an Everything Replacement Project – it is quite likely that the project will lose focus and end up not having metrics by which to guide decision-making or measure success or failure.

Taking the next step of putting numbers to their intuition and the logic they have mapped out using the Thinking Processes will further sharpen the focus of the management team. Here is one way they might go about developing metrics around the proposed changes.

In order to begin, the team will need to come up with valid numbers related to two factors: If they make the proposed changes by applying new or expanded technologies in their warehousing and shipping operations, how much more Throughput (T) will they be able to support while holding the line on Operating Expenses (OE)? Of course, they already know the key features that they are looking for in their search for supporting technologies, too. These were identified also by the Current Reality Tree (CRT): 1) integrated bar code labeling, 2) integrated ASN generation, and 3) reduction or elimination of paper-based processing.

These folks are already far ahead of any company that has started their search for a new ERP system by the traditional "requirements gathering" from all the departments. Plus, they are looking only at creating an Extended Readiness for Profit (the New ERP) by focused technology selection and deployment, not the wholesale approach that comes with traditional ERP – an Everything Replacement Project.

Well, this firm's management team is as honest as the day is long! So, even though they realize that the improvements they propose in the warehouse and shipping operations will allow these departments to support dramatic increases in Throughput, none of the changes being made will actually add Throughput to operations. They acknowledge that they are already getting almost every shipment out the door every day. The problem is that they are doing it using extra personnel and a lot of overtime. Of course, all that falls under the category of Operating Expenses.

The management team thus concludes the following:

delta-T = $0

delta-OE = $168,942 per year

delta-I = $75,000

I hear you ask: "Where did they ever come up with numbers like those?"

By following this firm's relatively complex CRT to the top of the tree, the management team is able to see that their current reality is driving Operating Expenses (OE) that are too high – growing at a faster rate than Revenues or Throughput (T). They are also experiencing higher than desired Inventory levels, and since carrying costs for Inventory contribute to Operating Expenses, excess inventory is a double-whammy – putting upward pressure on Operating Expenses, as well. Of course, higher Operating Expenses lead to a lower NPBT (net profit before taxes). The management team also recognizes that much of the fire-fighting they have been doing over the last years – caused by their treating UDEs as "problems" and a failure to manage their organization as a "system" – has limited the time, money and energy available to spend on new business development. Therefore, they see that they have actually missed out on potential growth opportunities – thus reducing Throughput.

Our company's management team now turns to reviewing the several "roots" and they determine the following:

Roots 1, 2 and 5 predominantly affect the warehouse and shipping department. In this particular case, many of the functions between warehouse operations and shipping overlap, so these will be considered together.

Root number 6 is also a warehouse issue, but it affects receiving and there are separate people who handle that function. Therefore, this root will be evaluated separately.

Root number 3 primarily affects the Production Management Team – a group of people that work together to try to keep the work flowing through the factory as smoothly as possible. However, it also has some implications for sales ("If I take a big order, what date can I promise to my customer for shipment?") and for customer service, too ("What's the status on the production of the products for order number N that's supposed to ship tomorrow?").

Root number 4 affects accounts receivable personnel, who must notify the appropriate customer service people whenever an order goes on hold. There are also other functional areas that must be aware of potentially delayed orders and must guard against accidentally releasing an order that should not be shipped. It gets complex quickly.

Finding your "bottleneck"

In The Goal, Eliyahu Goldratt points out that any "system" or organization is like a "chain." It is not a collection of loosely related functional groups – shipping, receiving, production, accounting, and so forth. Rather, like a chain, if you want to strengthen the "system," it is imperative that the weakest link be identified and efforts made to strengthen that link. If the weakest link is not strengthened, then the chain itself will not have been strengthened (improved) at all. Your effort may have added weight to the chain, but will have done nothing by way of improvement.

For simplicity's sake, let us say that the management team in our example organization has determined that the sales department is doing great. Sales and customer service are presently able to continue to sell more products, so the firm's bottleneck does not appear to be in sales or customer service. Let us also say that, despite the firm's rather primitive reliance upon weekly production meetings and spreadsheets, production has not yet become a bottleneck for producing goods to meet known demand.

On the other hand, warehousing and shipping operations are having an increasingly difficult time keeping up with picking, packing and shipping all the orders. There are several factors at work, it seems. One is that the sheer volume of orders of every kind is increasing. More importantly, the company has just opened an e-store on their Web site and has started selling some products direct to the consumer.

While this move has proven to be a good one and is quite profitable for the organization, it has dramatically changed picking-pack-ship operations. Since the firm used to sell mostly to dealers and distributors, they generally picked and packed large quantities into a smaller number of shipments. All of their processes were configured to handle this kind of order processing.

Now, however, with the e-store in operation, shipping finds that, in addition to picking and shipping the large orders with large quantities in each order, they must also pick, pack and ship hundreds of small orders every day. Some of these orders are just a single item in a box. They must do this every day; and this change has had a dramatic impact on them since all the shipping, manifesting and labeling is presently a very time-consuming, paper-based process. Clearly, the pick-pack-ship operation is this firm's bottleneck to reaching more of its goal.

If you and your management team have been following along and you have completed your own Current Reality Tree, you will need to take similar steps to those described above. You will need to look at the roots of your CRT and consider which parts of your organization need to be changed (i.e., what needs to change) and, more specifically, try to identify your "bottleneck" operations – those operations in particular that represent the weakest link in your system's chain of actions that result in producing Throughput.

Note: If you determine that your "bottleneck" is – as is it is sometimes stated – "in the market," then what you are saying is that you have more capacity internally (within your system) do supply and deliver products or services than the market is willing to buy from you at this time. It is important to note that while the terminology is often applied to say, "The constraint or bottleneck is in the market," this is really a misleading misstatement.

If your team comes to the conclusion that your bottleneck is "in the market," then the real internal bottleneck is still internal and will likely be found in functions like

Research and development – timely production of innovative products or services that provide a sustainable market advantage

Marketing – development of new modes of communicating value to prospects and customers around your product or service offerings

Sales – creation and execution of a sales process and innovative new "un-refusable offers" that deliver more sales while sustaining Throughput

Elsewhere – quality, lead-time, packaging, and other factors can lead to customers or prospects not being interested in buying your products or services

18 November 2009

If you and your team have completed a Current Realty Tree (CRT), then you have taken the first valuable step in moving toward Extended Readiness for Profit -- the New ERP. You have begun the your revolt against traditional ERP and its Everything Replacement Project approach with all its foibles and pitfalls. And, you will notice, that you have not yet spent one thin dime on new technologies -- unless, of course, you went out to buy a copy of Microsoft Visio to neatly document your CRT.

The really good news is that, having created your CRT, you and your team have also taken a vital step toward understanding the "theory" that underlies how your organization -- your "system" -- presently works and does not work (when it doesn't). You likely also understand better how your system interacts with its environment -- that is, your supply chain and the economy in general.

Your Current Realty Tree is the new "framework" by which you will begin to evaluate all of your future actions for Extended Readiness for Profit.

Remember, there are three -- and only three -- things that every executive or manager must know in order to handle any situation and to bring improvement effectively to any organization:

What needs to change

What the change should look like

How to effect the change

By looking at the "roots" of your Current Reality Tree, you and your management team now know exactly what needs to change. If you CRT is accurate and you have been honest with yourself in its development, then your CRT is the answer to number 1 above -- what needs to change.

Furthermore, if you've followed along in all the steps to this point, you have also determined which of the things that need to change will required some investment in technology in order to see significant improvement. More importantly, however, you have likely also uncovered one or more things (roots) that can be addressed immediately and at little or no cost, and these things can start bringing real improvement to your organization to beginning tomorrow. You are already on your way to achieving more of your goal -- to making more money tomorrow than you are today.

One or more of the things you have already discovered may require an investment of zero dollars and may be capable of delivering dramatic increases in Throughput or significant decreases in Inventory -- either of which can be a boon to cash flow and cash velocity.

There is real work involved, however. Looking at the roots of your CRT will tell you what needs to change, but it will still be up to your team to lay out effective means of achieving the change. And, while the CRT is a great starting place, you should likely consider applying more of the Thinking Processes to help you build a logical "road map" for change. Consider building a Transition Tree (TrT), which can really function as that "road map," even though all the ground must still be covered to get to your destination of achieving more of your goal.

[See prior posts for links to more information about the other Thinking Processes.]

17 November 2009

STEP 5:Once you have completed your CRT, take a close look at the "roots." Roots are those entities at the bottom of the tree that have no arrow leading into them. Generally speaking, you will find that the roots of your CRT will fall into two very broad categories:

Things you can change or affect in some way, and

Things you likely cannot change or affect (de facto roots).

When classifying entities into the latter category (de facto) take great care. Do not allow yourself or your team to make excuses by simply saying that "we have no control over that." For example, quality issues from outside suppliers may not be in your direct control, but they are certainly within your realm of influence -- especially if you are a major customer of the vendor.

Once your team has identified all of the roots that fall into the first category, you will likely find that these roots may be further subdivided into three more categories:

Root causes for which improvement requires no new technologies

Root causes where you may achieve some improvement without the aid of new technologies, but further improvement may also be achieved by applying new technologies as part of an ongoing improvement process

Root causes where the most logical and most effective action toward improvement will involve the deployment of new technologies

Most of the organizations we work with find that more of the things they need to change for improvement do not involve investments in new technologies. If this is your case, then "Congratulations!" In less than one day (most likely) you and your management team have discovered how to begin system-wide improvement that

May be commenced immediately

May involve little or no cost

Will likely deliver improvements that increase Throughput, reduce Inventories or the demand for new Investment, and/or will probably help you hold the line on Operating Expenses while you grow your business

Equally as important, however, is the fact that if you find the need for new technologies, the cash flow from the non-technology early-win improvements can help pave the way for the investment in new technologies in the near future.

16 November 2009

STEP 4:Beginning with an initial pair of related UDEs (as described in the preceding post), continue building your logic by working out and agreeing upon cause-and-effect connections between the other UDEs as you add them to the whiteboard.

In our example, someone from purchasing has identified an unwritten policy of always buying from the lowest-priced supplier as being one of the things that is keeping the organization from making more money. This is, most likely, an astute observation, especially since it is counter-intuitive. The same party also said that "not including quality criteria" in the organization's purchase agreements with vendors leads to more problems. We've added these as entities 30 and 40 in the figure below.

As you build your logical tree, the arguments regarding the logic should be restricted to the following categories of legitimate reservations:

Clarity - Every statement (entity) should be clearly understood as to its meaning and intent.

Entity Existence - Be sure that the entity (UDE) actually exists.

Causality Existence - Does the proposed cause-and-effect (arrow) represent reality? It must be the actual cause and effect in a CRT. In other logical tree forms it may be a planned or desired effect.

Cause Insufficiency - Ask the team, "Does Entity A actually lead to Entity B all by itself?" If not, then you may need to add clarifying entities (as we did in our example in the preceding post).

Additional Cause - It may be true that Entity A causes Entity B, but there may be a additional cause that also leads to B. It is possible that both "If A, then B" and "If C, then B" both exist simultaneously.

Predicted Effect Existence - This technique may validate or invalidate logic by demonstrating how the existing of one thing logically proves or disproves some other proposed reasoning. For example, if someone were to say, "Joe Smith is struggling financially," someone else might say, "If Joe Smith were struggling financially, one could predict that he would NOT be in the process of purchasing a new yacht for $1.5 million."

Tautology - A tautology is a statement that must be true by definition, but does not necessarily indicate a cause-and-effect relationship. For example, if we say, "There are ambulances on the freeway, so there must be an accident," we are not necessarily implying that the ambulances caused the accident. In fact, the presence of ambulances on the freeway does not necessarily imply that there is an accident at all. They could be going about other business, such as transporting a patient not related to any car accident.

It is important to restrict your team to using these kinds of logical arguments relative to the logic in your tree. This prohibits (or, at least, exposes) the introduction of "company politics" into the logic so that you and your team can see "reality" and not some slanted view of what is working and not working in your organization.

Continue building your CRT until you have incorporated all of your UDEs. (On rare occasions we will exclude some UDEs in the construction of a CRT. Generally, the cause for such exclusions is that one or more of the UDEs is really outside the scope of the "system" being considered. For example, if the "system" being addressed is limited to the "sales process," we may omit UDEs related to post-sales actions.)

When topping off your CRT, be sure to get to your statements about not reaching your goal. For example, if your team's goal were (as we suggested) "to make more money both now and in the future," then some of evidences of not reaching your goal might be entities at the top of your tree like: "We do not generate enough Throughput" and "Our Operating Expenses are too high."

NOTE: If you'd like to receive a sample of a full CRT, please contact me at this email address: rcushing(at)ceoexpress(dot)com.

13 November 2009

STEP 2:Having collected some ten to 20 UDEs from your team, weed out any duplicates and make certain that the UDEs are clearly understood by everyone on the team, rewording them as necessary.

A well-written UDE will contain an "actor" as well as some description of the affects being experienced. For example, your team would need to clarify further a UDE that says only "poor quality." Is the poor quality coming from a vendor or is it your own organization that is producing poor quality? You will need to clarify such a UDE, after discussion, by rewriting it as, "We are getting up to 10% defect rates on widgets coming from ABC Company."

Another factor to consider: If you end up with UDEs that read something like "Because we get poor quality widgets from ABC Company, we end up with high scrap rates in Z-machine processing," then you will want to break that down into two UDEs that might read as:

"QC reports that we are getting up to 10% defect rates on widgets coming from ABC Company" and

"We have high scrap rates in our Z-machine process"

The reason for doing this is that the CRT construction itself will define the cause-and-effect logic, as we will see shortly.

Once everyone on the team is clear on the meanings of the UDEs you have collected, you and your team will be ready to move on to the next step in the construction of your CRT.

STEP 3:In this step you and your team will begin linking the UDEs in cause-and-effect relationships. We usually do this on a whiteboard using the sticky-notes for the UDE entities and drawing in the connecting if-then arrows on the whiteboard.

Since one of the UDEs submitted had a "because" in it, and since we needed to break down that UDE into its components, we have a great place to start building our CRT, using logic already implied in our discussion.

Note that we assign numbers to the entities as we place them on the board. This is merely for the purpose of facilitating discussion and documentation. The numbers become shorthand for referring to an entity (rather than restating the entities whole contents).

One would read this beginning logic as: "IF [10] we get up to 10% defect rates on widgets from ABC Company, THEN [20] we have high scrap rates on our Z-machine processing."

There is additional logic implied in this statement, and everyone may be fully satisfied with the statement as it stands (understanding that the defective widgets consumed by the Z-machine process contribute to the defect coming out of that processing. However, if there are any questions, one might simply add a clarifying entity (as shown below).Here you will note that we used a letter (rather than a number) to identify clarifying entities in the logic tree. We have also used an oval to encircle the two arrows leading from [A] and [10] to [20]. This oval constitutes an AND JOIN, so that the logic would be read as: "IF [10] we get up to 10% defect rates on widgets from ABC Company, AND [A] we use widgets from ABC Company in our Z-machine processing, THEN [20] we get high scrap rates on our Z-machine processing."

When building your CRT, you and your team may begin anywhere. Pick a couple of UDEs that appear to have some fairly obvious cause-and-effect relationship and place them on the whiteboard and join them with an arrow. Then seek the team's agreement with the logic before moving on to add another entity.

As I said, we typically do this on a whiteboard using sticky-notes. It can get a little messy. Don't let it get too out of hand, as you will need to be able to read your CRT and make sense of it when you're through building it.

However, once you're done with building it on the whiteboard, someone will have to undertake to document the CRT for review and final approval. We generally do this using Microsoft Visio, but any flow charting software (or even the drawing tools in Microsoft Word) could be used to create your final version. When creating a first draft, clean up the language in the entities to make the tree read relatively naturally from bottom to top. Also, rearrange the entities to reduce the number of arrows crossing one another just for general clarity.

12 November 2009

Dr. Eliyahu M. Goldratt introduced the Theory of Constraints (TOC) to the world in his book entitled The Goal, back in 1984. In the 25 years since its introduction, TOC has been applied successfully in a vast array of businesses, industries, not-for-profit organizations and government entities.

Too many executives and managers are stumbled by the use of the word "theory" in TOC. Unfortunately, this is something you'll likely have to just "get over." Dr. Goldratt was a physicist before becoming involved in the world of business, so he calls it a "theory," under the assumption that someone, someday may prove it wrong -- that an exception may be found. To date, however, no such exception has been discovered.

The Current Reality Tree (CRT)The CRT is predicated upon the fact that, in most organizations or "systems," the many factors that may be identified as "problems" really arise from a relatively small number of "roots" or "root causes." Applying the CRT Thinking Process allows executives and managers to capture and decode "tribal knowledge" about how their organizations function, and what is or is not working in a logical, re-readable written form.

Once placed in the CRT form, using rules of logic, this written document may be used by the entire management team to read, re-read, discuss and modify the logic until everyone is certain that the logic presented in the CRT reflects the "reality" expressed within the organization's operations. Hence, the tool's name is the "Current Reality Tree."

Constructing a Current Reality TreeWhile experience in guiding a team through the Thinking Processes is beneficial, there is no magic in creating a CRT or applying any of the other TOC principles. You do not need me or any other consultant to do this. There are a number of good resources available online and in print that may be used to guide your firm through the effort. However, if you want a short-cut to effective, first-time application the Thinking Processes -- if you'd like to make real progress in the first day of your effort -- then using an experienced consultant may be the most cost-effective way of getting there.

Nevertheless, here are the basic steps:

STEP ONETo begin constructing a CRT, executives should gather a cross-functional team of ten or 15 key people from across the organization. This team should be briefed on the goal of creating a CRT and why it is important to the organization.

Having gathered the team, the members of the team should be asked select a single "goal" for the system (organization). In a for-profit organization, and where working on the "big picture" for the entire system, we recommend a goal similar to "To make more money -- both today and in the future." (While this is likely not something you want to put on company brochures as a mission statement, it is the true goal of every for-profit organization and every other goal is subsidiary to it. Quality, customer service, market leadership, or any other goal cannot be maintained for long in the absence of making money.)

With the single goal in mind, the next question to set before the team is this: "What is keeping us from reaching this goal?"

Naturally, when this question is asked, you are likely to get different responses from the sales and marketing folks than you will get from accounting or the production department. Ask them to jot down their responses as simple, clear sentences. Generally, I ask them to do so on 3"x3" sticky-notes. Ask them to include an "actor" in each sentence. Also, ask them to NOT include any "because" statements. Simply state the hurdle or blockage to achieving the goal.

Examples might be:

Salespeople spend too much time in the office doing paperwork

Our prices aren't competitive

The warehouse has too many out-of-stocks

Our lead times aren't competitive

... and so forth

In working with the Thinking Processes, we stop referring to these as "problems," right away. We call these "Un-Desirable Effects" or "UDEs" (pronounced: YOU-dee-eez), for short. The reason we do this is because when we have "problems" we want to solve them. But, as we will see, all of these cannot be "solved" by addressing them directly. They are caused by occurrences elsewhere in the "system."

11 November 2009

What executives and managers in most organizations lack is a sound "theory" about how their own organization works and responds to its environment as a "system." They know how each department works -- more or less -- but they have never really stopped to think how the "system" works as a whole.

Asked directly, most executives and managers could not tell you -- with specifics -- why three of the initiatives that they have undertaken in the last two years seem to have delivered some improvement (but not all that they expected). Nor could they describe for you precisely why another five of the initiatives they labored over delivered no measurable results -- assuming that they actually did no damage to the organization. (Of course, this whole conversation assumes that you can actually get such executives or managers to admit that things they tried produced no results, in fact. Generally, they have willingly pushed out of their mind those matters over which they have expended precious time and energy to no effect -- only to give up in disgust. Then they tried the next management fad in its place.)

"I am not yet convinced regarding the connection between 'knowledge' and 'theory,'" I hear you saying. Then consider this:

How many people had seen apples falling from trees (or witnessed similar events) for how many hundreds or thousands of years before Sir Isaac Newton postulated a "theory" about a force we call gravity? Everyone had experienced gravity and everyone had information about the effects of gravity, but until Newton, no one had any knowledge about gravity.

Once the "theory" was set forth, cause-and-effect experiments could be developed to measure the effects of gravity. Based on the results of these experiments, one could then postulate if-then correlations: if we do X, then Y should be the result.

If management is anything, it is about being able to propose actions with a predictable -- not random -- effect on the "system" to which the action is being applied.

But, what of the second wrong assumption in the chain of reasoning (in the prior post)?

It should be clear now that it is not more information that will help us manage better. Rather, it is a sound theory or logical framework by which to understand how the "system" functions and interacts with its environment. The second wrong assumption is, then, "More information means we can manage better."

The correct approach would be to say: "If we can develop a sound and effective framework or theory by which to interpret the information coming from our organization (our "system"), then we will be able to manage better."

And, since developing a theoretical framework is likely not a function that will be much enhanced by technologies, then the next step is not to rush out to buy new software or hardware. Clearly, the next step should be to find a way to develop such a sound theoretical framework.

10 November 2009

Failure No. 3: Substantial -- sometimes even huge -- budget overruns
Unfortunately, the causes of the "go-live" delays typically are also the major contributors to exorbitant budget overruns, too. Executives and managers that have lost sight of specific and measurable objectives -- or they never had any such objectives in mind from the beginning -- are likely to make many foolish decisions related to customizations and modifications. Having lost focus -- or never having had any focus -- such projects will soon take on a life of their own. Managers may be incapable of bringing them back under control without the direst of actions.

Failure No. 4: Stopping or slowing production and delivery
This is clearly the worst-case scenario: the very technology investment undertaken with some vague and likely unquantified hope of delivering business advantages becomes an albatross around the neck of the whole organization. Rather than delivering a "sustainable business advantage," the new technology bogs down or stops the organization's ability to produce Throughput entirely.

Almost without exception, this dire result can be traced back to a poor understanding of the organization's real situation prior to the decision to deploy new technologies. The circumstances may be further aggravated by the fact that the organization did not obtain a valid proof-of-concept from the technology vendor before the purchasing decision was made and the Everything Replacement Project (traditional ERP) undertaken.

The Everything Replacement Project (traditional ERP) decision to buy

Since the introduction of the computer especially, executives and managers with money to spend on technologies have often carried about within themselves a peculiar mindset. That mindset tells them, "If I just had more data; if I just knew more details about my enterprise, then I could manage better. In fact, if I could know in detail everything about my enterprise, then I could manage perfectly."

Of course, traditional ERP (Everthing Replacement Project) vendors prey on this mindset. In fact, they often help instill and solidify this mindset within their prospects and clients. As a result, the decision-making process regarding whether executives and managers should buy new or more technology often follows along these lines:
There are at least two incorrect assumptions in this chain of reasoning.

The first wrong assumption is that "information" is the key to better management. Information is not the key to better management. Knowledge is the key to better management and information is not knowledge.

Data gathered and presented by technology is a representation of what your organization has experienced. That experience (history) may include what you sold, some cost data, some profit data, data about your expenses, and so forth. However, as W. Edwards Deming put it so plainly, "Experience teaches you nothing without theory." He also said, "Knowledge comes from theory."

09 November 2009

So, what's wrong with traditional approaches to ERP? Why do so many ERP implementations lead to disappointing results? Why do so many companies spend so much money on new technologies and then end up reaping so little return on their investment?

Failure No. 1: Not achieving the planned return on investment (ROI)
It remains today a regrettable fact that many small to mid-sized companies considering new technologies have only the vaguest of notions about the ROI that their new investment should deliver. This is not to say that executives and managers haven't thought out ROI, or even that they may not have already "pinned a number" on the ROI that they'd like to see from the expenditure of their time, energy and money.

What they do not know -- far too frequently -- is precisely how the new technology will deliver results. They have not tied the expected results to specific improvements in Throughput, specific reductions in Investment, or specific savings in Operating Expenses. Rather, there appears to be a general consensus among executives and managers -- despite considerable evidence to the contrary -- that investments in information technologies (IT) sort of auto-magically deliver a return on investment (ROI). That, somehow, IT and automation investments bear an inherent capacity to make the company better and more profitable.

Over the more than 25 years that I have been working with IT from both sides of the desk -- as an executive and as a consultant -- there have been fewer than a handful of companies with which I have worked that actually calculated an ROI for their investment in technology. Fewer still had any measurable objectives for specific IT investments beyond some number clearly picked from the air like "increase revenues by 5%" or "cut manufacturing costs by 7%." Almost none of these firms could tie specific technology functional deployments to the expected ROI.

Given these facts, it is no wonder that traditional ERP (Everything Replacement Project) fails to deliver ROI. The executives and managers deploying the new ERP have not based their ROI expectations on much more than "gut feelings" and some vague sense that having more data will make them better managers.

Failure No. 2: "Go-live" delayed inordinately
Substantial delays to "go-live" in Everything Replacement Projects (traditional ERP) are generally attributable to one or more of the following factors:

Poor decisions related to customizations or modifications -- when they are selected; how the program code is designed, developed and managed; and the methods chosen for testing and deployment

Executive management's improper view of the goals and objectives of a valid ERP project -- thus leading to out-of-control scope creep, usually with absolutely no correlation to project ROI

The organization being overwhelmed by an Everything Replacement Project -- rather than being focused on leveraging specific technologies for the benefit of the "system" (i.e., the organization) as a whole

06 November 2009

Unfortunately, the trade press has been rife with horror stories describing ERP (enterprise resource planning) projects that have gone off-track or failed entirely. The stories have gone on for well more than a decade and, although the number seems to be decreasing, in part that decrease is due to the smaller number of companies actually making their first leap in ERP solutions.

In a KPMG Canada survey from 1997, more than 61% of the respondents deemed their ERP implementation as less than a success. Four years later (2001), a Robbins-Gioia survey found that 51% reported their ERP implementations were not successful. And, Bob Lewis, writing in InfoWorld has suggested that only about 30% of ERP implementations are actually considered "successful" by some measures.

It appears that traditional approaches to ERP software selection, planning and deployment have, by almost any measure, proven to be capable of delivering any sustainable business advantage in fewer than half the reported cases.

In the following series of posts I will begin introducing what I believe to be a radical new approach to ERP, an approach I call Extended Readiness for Profit -- The New ERP. The results of this approach on the working relationship between business (financial) goals, measurable business objectives, and new technologies include:

A holistic view of the enterprise that encompasses its people, its processes, its products and services, its trading partners, and its technologies

Clarity and focus on finding and making the changes in the organization and supplying technologies when and where they will deliver a sustainable business advantage

Concepts that help executives and management in the organization establish sound budgets for each key component of any technology initiative based on calculated and measurable benefits expected to flow from the implementation

Sound techniques that will help executives and managers unlock the enterprise's "tribal knowledge" in order to leverage what the organization already knows in a process of ongoing improvement (POOGI)

SOME DEFINITIONS

Revenues (R) - We will employ the standard accounting definition of revenues or sales where this term is employed.

Truly Variable Costs (TVC) - Here we include only the costs involved in producing a unit of Revenue that truly variable with the unit of Revenue. Typically, TVCs include direct materials, subcontract or piece-rate labor, commissions, royalties, other outside services, and so forth. However, since normal employee labor is not directly variable with a unit of production, production labor is not included in TVC calculations.

Inventory or Investment (I) - In most inventory-based enterprises, the most volatile form of investment is inventory. However, since a key component in the calculation of ROI (Return on Investment) is the value invested, we will not limit discussions of "I" to only inventory.

Operating Expenses (OE) - Operating Expenses is all the money the organization pays out day-after-day, month-after-month to support the production of Revenues. Since most employees -- even so-called "direct labor" employees -- are paid on this basis (i.e., they are not sent home early if work is slow; they are seldom laid off; they get paid the same whether their work unit produced 100 widgets or 1,000 widgets in a given period of time). If Revenues are down in a given month, for example, chances are the payroll amount was the same (within a few percentage points, anyway).

Return On Investment (ROI) - As with Revenue, the traditional calculation method may be used. However, for clarity and for improved accountability, we will link specific initiatives to specific measurable results. Therefore, when considering any specific POOGI initiative, we calculate ROI for that initiative using the following formula:

If no change in Investment (I) is required, then a simpler formula may be applied:

Net Profit Before Taxes (NPBT) - Our definition will be equivalent to the general accounting definition, but calculated using the following formula:

NPBT = R - TVC - OE

Or, since T = R - TVC, we may substitute and shorten the formula to read:

05 November 2009

In this portion of our series, we're going to talk about how to put a "framework" or "theory" around what you already know about your business enterprise. This is not an exercise in "business theory." This is a real and practical approach to gaining effective control of your enterprise after (perhaps) years of "muddling through" with more or less mediocre results.

One of the reasons executives and managers are not able to really "understand" what they "know" about their own organizations is that, since they are unaware of a "tool set" to aid them, they never actually put what management "knows" (we call it "tribal knowledge") about how their organization works -- or doesn't work -- on paper. Therefore, in the absence of such a written document, the managers themselves cannot read and re-read their own logic about cause-and-effect relationships that flow throughout their enterprise.

Our mind makes thousands of assumptions about what we think we know. Our mind processes these assumptions and incoming information so rapidly, we are unable to filter out our incorrect thinking or invalid assumptions adequately. Putting our thoughts down on paper helps us step through the logic that is leading us to certain conclusions.

Equally important, however, is that fact that, if we never get our reasoning down on paper, it is nearly impossible for us to invite others to truly analyze our logic -- to critically review our logic -- in an effort to help us bring about lasting improvement. As a result, not only do we not realize that we have flaws in our thinking about what's happening in our organization, others who might bring beneficial insights to our aid cannot do so because they, too, cannot help us find the flaws in our rationale. This inevitably leads to the fact that these undiscovered flaws in our thinking about how our organization really works -- or does not work -- remain embedded in our decision-making processes.

The good news is that there is an outstanding set of tools that are readily accessible, easily understood, and relatively simple to apply that will help executives and managers lay hold of "tribal knowledge" and reduce it to an understandable framework (or "theory") about how their organizations function in a real and practical way. Others that have applied that tool set have said things like:

"I have never seen my business so clearly before."

"We truly understand our business for the first time."

"This process has helped us regain a sense of control over our enterprise."

"For the first time in a long time, we are empowered to move proactively toward real, lasting improvement."

"We now have a consistent framework for diagnosing problems and planning for improvement."

What is this simple, yet amazing, tool set for executives and managers?

So, continue to say, "We know!" and miss out on the opportunity for real, practical and sustainable improvements to your enterprise, or discover a whole new, easy-to-use and effective tool set for starting down the road to ongoing improvement.

04 November 2009

In Part 1 of this series, I discussed how many executives and managers fail to reap benefits from new methods and ideas -- especially if these new methods and ideas arrive in the form of a "consultant" -- simply because these executives and managers believe that the already know what can be known about their organizations and their industries. This prevents many organizations from growing to their full potential.

Unfortunately, what far to many executives and managers have is a lot of information about their businesses and their industries. What they desperately lack is "theory" by which to interpret and understand the information at their disposal.

G. K. Chesterton put it this way in Tremendous Trifles (Beaconsfield, Britain: Darwen Finlayson, 1968): "One of the four or five paradoxes which should be taught to every infant prattling on his mother's knee is the following: that the more a man looks at a thing the less he can see it, and the more a man learns a thing the less he knows it. The Fabian argument of the expert, that the man who is trained should be the man who is trusted would be absolutely unanswerable if it were really true that the man who studied a thing and practised it every day went on seeing more and more of its significance. But he does not. He goes on seeing less and less of its significance."

Think of Sir Isaac Newton and the story of his having begun his development of the theory of gravity because he had seen an apple falling from a tree. Surely there had been tens of thousands of individuals that had witnessed objects falling to the ground under the influence of gravity for several millennia prior to Sir Newton's experience. Yet, no one understood "gravity."

It has only been since Isaac Newton put a "theory" around gravity that men could take what they had experienced with gravity and put it into a framework -- a theoretical context -- that made the experience understandable to them. Furthermore, the framework (the "theory") gave men the opportunity to predict outcomes of certain actions relative to the gravitational affects. This meant that men could plan and execute with some real certainty as to the results they would obtain under "gravity."

Precisely the same is true of business.

Executives and managers have all manner of data in their hands relative to the performance of their enterprises. What they lack is a "theory" by which that data may be abstracted and understood for the purposes of effective management. A framework that will help them bring simplicity out of the complexity before them.

In all too many cases, the missing "data" for beginning the process of ongoing improvement is to be found within the organization at all. The missing component for executives and managers is quite often this simple point: there is a simple method available to help organizational leadership logically analyze what they already know internally.

In the absence of a "tool set" that helps management bring forth "knowledge" from their "information," executives and managers tend to continue "tinkering" with their businesses. They make changes here or there to see if the change helps.

Sometimes such change seems to help, other times the change actually makes things go worse than before. Still other times, the change is made and their is no perceptible affect on the organization at all.

This is no way to run a business -- or any other kind of organization!

Executives and managers are yearning -- sometimes without even recognizing what is lacking -- for a simple, effective tool to help them gain control of their enterprises once again.

03 November 2009

As a consultant, I meet folks in business very frequently that are pretty much convinced along one or more of the following lines:

"We already know about our business." By this owners and managers mean to express the sense that they already understand how their business works and what it will take to make the business better.

"There might be some room for improvement, but the returns on any improvement we could make would be so small, it's not worth the effort." This statement or mind-set by owners and managers is a restatement of the so-called "law of diminishing returns."

"Our business (or industry) is unique, so we have to work this way." This is an argument suggesting that a consultant, being an outsider to the business or the industry, can't possibly bring any valuable insight. Furthermore, even if he or she does, we probably couldn't make the recommended changes anyway.

On far too many occasions, when I meet such owners and managers, I am simultaneously witnessing an organization that started off great, grew rapidly, and still has the entrepreneurs that started the firm in the driver's seat. They are also, quite often, over-the-hill.

I'm not talking about the owners or managers being over 40 (or over 50) years of age. I'm talking about the fact that their once booming organization is now in a state of coasting on its earlier success or even in the early stages of decline. Sometimes management hasn't even recognized that fact yet. They may be thinking that they are just in a temporary slump, that things will inevitably pick up again, and their firm will regain its earlier vigor.

Sadly, the chances of such a revitalization are usually slim.

While it is unequivocally true that a consultant can never learn everything about an enterprise that the owners and management know from all their years in their industry and in their own business, it is equally true that there are more things that are similar about human organizations than there are things that are different between human organizations.

Among the key things that are TRUE about all human organizations is that they all rely upon the same three scarce resources:

Time

Energy

Money

Furthermore, contrary to popular opinion, managing the first two -- time and energy -- is more important than managing the third (money). This is true simply because if you had unlimited time and unlimited energy, you could have all the money you wanted or needed.

For this simple reason, focus is everything. As organizations grow and expand, the entrepreneurs who manage them start to lose focus, and they do not have within their knowledge or skills a set of tools to help them focus again on those few simple things that will revitalize their over-the-hill firms.

Having gained, perhaps, many years of experience in their industry and with their own firm, they frequently find that their experience really does not contribute that much toward discovering effective responses to the new challenges their firm now faces. What is missing is a method for discovering a new theory or framework that clarifies how their grown and expanded organization now works -- or doesn't work -- at making more money.

[Next time: Why is it so difficult for owners, executives and managers to discover how to effectively change their companies for ongoing, vital growth?]